The Key Words of Macroeconomics

Chapter 1
Unit one

Macroeconomics: The study of the economy as a whole. (Cf. microeconomics.)
In.ation rate: A measure of how fast prices are rising
Real: Measured in constant dollars; adjusted for in.ation. (Cf. nominal.)
Recession: A sustained period of falling real income.
Depression: A very severe recession.
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In.ation: An increase in the overall level of prices. (Cf. de.ation, disin.ation.)
De.ation: A decrease in the overall level of prices. (Cf. disin.ation, in.ation.)
Model: A simpli.ed representation of reality, often using diagrams or equations, that shows how variables interact.
Unemployment rate: The percentage of those in the labor force who do not have jobs.
Endogenous growth theory: Models of e-conomic growth that try to explain the rate of tech-nological change.
Exogenous variable: A variable that a par-ticular model takes as given; a variable whose value is independent of the models solution. (Cf. en-dogenous variable.)
Market-clearing model: A model that as-sumes that prices freely adjust to equilibrate sup-ply and demand.
Flexible prices: Prices that adjust quickly to equilibrate supply and demand. (Cf. sticky prices.)
Sticky prices: Prices that adjust sluggishly and, therefore, do not always equilibrate supply and demand. (Cf. .exible prices.)
Microeconomics: The study of individual mar-kets and decisionmakers. (Cf. macroeconomics.)
Chapter 2


Unit two
Gross domestic product (GDP): The total income earned domestically, including the income earned by foreign-owned factors of production; the total expenditure on domestically produced goods and services.
National income accounting: The account-ing system that measures GDP and many other related statistics.
Stock: 1. A variable measured as a quantity at a point in time. (Cf. .ow.) 2. Shares of ownership in a corporation.
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Flow: A variable measured as a quantity per unit of time. (Cf. stock.)
Value added: The value of a .rms output minus the value of the intermediate goods the .rm purchased.
Imputed value: An estimate of the value of a good or service that is not sold in the marketplace and therefore does not have a market price.
Underground economy: Economic trans-actions that are hidden in order to evade taxes or conceal illegal activity.
Nominal: Measured in current dollars; not ad-justed for in.ation. (Cf. real.)
GDP de.ator: The ratio of nominal GDP to real GDP; a measure of the overall level of prices that shows the cost of the currently produced bas-ket of goods relative to the cost of that basket in a base year.
National income accounts identity: The equation showing that GDP is the sum of con-sumption, investment, government purchases, and net exports.
Consumption: Goods and services purchased by consumers.
Investment: Goods purchased by individuals and .rms to add to their stock of capital.
Government purchases: Goods and services bought by the government. (Cf. transfer pay-ments.)
Net exports: Exports minus imports.
Gross national product (GNP): The total income of all residents of a nation, including the in-come from factors of production used abroad; the total expenditure on the nations output of goods and services.
Seasonal adjustment: The removal of the regular .uctuations in an economic variable that occur as a function of the time of year.
Consumer price index (CPI): A measure of the overall level of prices that shows the cost of a .xed basket of consumer goods relative to the cost of the same basket in a base year.
Laspeyres price index: A measure of the level of prices based on a .xed basket of goods. (Cf. Paasche price index.)
Paasche price index: A measure of the level of prices based on a changing basket of goods. (Cf. Laspeyres price index.)
Discouraged workers: Individuals who have left the labor force because they believe that there is little hope of .nding a job.
Labor force: Those in the population who have a job or are looking for a job.
Unemployment rate: The percentage of those in the labor force who do not have jobs.
Chapter 3

Unit three
Factor of production: An input used to pro-duce goods and services; for example, capital or labor.
Production function: The mathematical re-lationship showing how the quantities of the factors of production determine the quantity of goods and services produced; for example, Y=F(K, L).
Constant returns to scale: A property of a production function whereby a proportionate in-crease in all factors of production leads to an in-crease in output of the same proportion.
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Pro.t: The income of .rm owners; .rm rev-enue minus .rm costs. (Cf. accounting pro.t, eco-nomic pro.t.)
Marginal product of labor (MPL): The amount of extra output produced when the labor input is increased by one unit.
Diminishing marginal product: A char-acteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant.
Marginal product of capital (MPK): The amount of extra output produced when the capital input is increased by one unit.
Economic pro.t: The amount of revenue re-maining for the owners of a .rm after all the fac-tors of production have been compensated. (Cf.
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accounting pro.t, pro.t.)
Accounting pro.t: The amount of revenue remaining for the owners of a .rm after all the fac-tors of production except capital have been com-pensated. (Cf. economic pro.t, pro.t.)
CobbCDouglas production function: A production function of the form F (K, L)= AKαL1.α where K is capital, L is labor, and A and α are pa-rameters.
Disposable income: Income remaining after the payment of taxes.
Consumption function: A relationship show-ing the determinants of consumption; for example, a relationship between consumption and dispos-able income, C=C(Y-T).
Marginal propensity to consume (M-PC): The increase in consumption resulting from a one-dollar increase in disposable income.
Interest rate: The market price at which re-sources are transferred between the present and the future; the return to saving and the cost of borrowing.
Nominal interest rate: The return to sav-ing and the cost of borrowing without adjustment for in.ation. (Cf. real interest rate.)
Real interest rate: The return to saving and the cost of borrowing after adjustment for in.ation. (Cf. nominal interest rate.)
Balanced budget: A budget in which re-ceipts equal expenditures.
Budget de.cit: A shortfall of receipts from expenditure.
Budget surplus: An excess of receipts over expenditure.
National saving: A nations income minus consumption and government purchases; the sum of private and public saving.
Private saving: Disposable income minus con-sumption.
Public saving: Government receipts minus government spending; the budget surplus.
Loanable funds: The .ow of resources avail-able to .nance capital accumulation.
General equilibrium: The simultaneous e-quilibrium of all the markets in the economy.
Chapter 4

Unit Four
Money: The stock of assets used for transaction-
s. (Cf. commodity money, .at money.)
Fiat money: Money that is not intrinsically useful and is valued only because it is used as mon-ey. (Cf. commodity money, money.)
Commodity money: Money that is intrinsi-cally useful and would be valued even if it did not serve as money. (Cf. .at money, money.)
Gold standard: A monetary system in which gold serves as money or in which all money is con-vertible into gold at a .xed rate.
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Monetary policy: The central banks choice regarding the supply of money.
Central bank: The institution responsible for the conduct of monetary policy, such as the Fed-eral Reserve in the United States.
Open-market operations: The purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply.
Currency: The sum of outstanding paper mon-ey and coins.
Demand deposits: Assets that are held in banks and can be used on demand to make trans-actions, such as checking accounts.
Reserves: The money that banks have re-ceived from depositors but have not used to make loans.
100-percent-reserve banking: A system in which banks keep all deposits on reserve. (Cf. fractional reserve banking.)
Fractional-reserve banking: A system in which banks keep only some of their deposits on reserve. (Cf. 100-percent-reserve banking.)
Financial intermediation: The process by which resources are allocated from those individ-uals who wish to save some of their income for future consumption to those individuals and .rms who wish to borrow to buy investment goods for future production.
Bank capital: The resources the bank owners have put into the institution.
Leverage: The use of borrowed money to sup-plement existing funds for purposes of investment.
Capital requirement: A minimum amount of bank capital mandated by regulators.
Monetary base: The sum of currency and bank reserves; also called high-powered money.
Reserve-deposit ratio: The ratio of the amoun-t of reserves banks choose to hold to the amount of demand deposits they have.
M1, M2:Various measures of the stock of mon-ey, where larger numbers signify a broader de.ni-tion of money.
Currency-deposit ratio: The ratio of the amount of currency that people choose to hold to the amount of demand deposits they hold at banks.